FOMC Minutes: The inflation debate continues

Philip Marey, Senior US Strategist at Rabobank, explains that the minutes of the FOMC meeting of September 19-20 confirmed what we already knew from various Fed speakers, hence little market reaction.

Key Quotes

“While the debate about the inflation outlook continues, most participants have already taken positions about the next rate hike. Many participants continued to believe that that the cyclical pressures associated with a tightening labor market were likely to show through to higher inflation in the medium term. In addition, many judged that at least part of the softening in inflation this year was the result of idiosyncratic or one-time factors, and, thus, their effects were likely to fade over time. However, at the same time many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent.”

“Fed is still heading for the third hike

On balance, many participants thought that another hike later this year was likely to be warranted if the medium-term outlook remained broadly unchanged. Several others noted that their decision would depend importantly on whether the economic data in coming months increased their confidence that inflation was moving up toward the 2% target. A few participants thought that additional hikes should be deferred until incoming information confirmed that the low readings on inflation this year were not likely to persist. It is clear that the majority in the FOMC continues to believe in the Phillips curve, despite its conspicuous absence in recent years. In combination with the notion that monetary policy works through the economy with a lag, this leads them to think that a third rate hike is warranted before the end of the year. This is despite the fact that low inflation this year remains a mystery to Fed. Therefore if the incoming data are not sufficiently weak to change the Fed’s mind, we will shift our call for the next hike to December (from 2018).”

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